What do falling oil prices mean for U.S. shale plays? | eaglefordtexas.com.
As oil prices slip from their lofty perch, the effect on U.S. shale producers remains to be seen — but an impact, if any, is going to be on a play-by-play basis, analysts said.
Brent, the international benchmark for crude, had soared above $115 in June, a peak for 2014. Last week, it dropped to $86.16 per barrel. Meanwhile, the U.S. benchmark for crude at West Texas Intermediate (WTI) slipped to $82.75 per barrel last week.
Prices have been dropping because of a combination of factors, including sluggish economic growth and slowing global demand. Also playing a role is growing U.S. oil production from shale plays. U.S. crude oil production soared to about 7.4 million barrels per day in 2013, according to the U.S. Energy Information Administration.
Meanwhile, Saudi Arabia, which produced about 9.6 million barrels per day in 2013, has indicated it would rather cut prices than production, reasserting its place in the market and putting pressure on fellow members of OPEC, or Organization of the Petroleum Exporting Countries.
“Given where we are in the year, in October, we probably won’t see much change in 2014, because everyone was set at that $90 a barrel mark,” said Jason Wangler, an analyst with Wunderlich Securities.
“We may see certain areas that would slow and certain areas that are not as affected because they’re still making good money,” Mr. Wangler said.
When natural gas prices plummeted to a 10-year low in 2012, drillers moved rigs from more expensive shale plays to less expensive ones. Even the same shale play can vary. For instance, the Marcellus Shale had spots that offered a good return for producers, even when gas prices slipped below $4 per thousand cubic feet.
Phani Gedde, an analyst with Wood Mackenzie, said the break-even price varies considerably among the major oil shale plays — the Bakken of North Dakota and the Eagle Ford and Permian shales of Texas.
“A great majority of that production breaks even at around $75,” Mr. Gedde said.
If operators shift rigs, it will likely opt to move away from fringe areas to focus on more reliable core areas if prices fall and stay low for a while, he said.
“I think there will be some reduction, but not pronounced reductions,” he said.
When natural gas prices began to fall, it took time for drillers to respond. “It wasn’t until gas prices reached $2 did we see a big slide,” Mr. Gedde said. “There’s a psychological threshold for oil at around $70 per barrel.”
If this pricing sticks around for a long time, it will impact operators that are not hedged against such swings, he noted.
Related: Permian Basin operators try to get a handle on oil prices
There’s no one-size-fits-all price.
Among the oil-rich shale plays, the Williston Basin of North Dakota and some plays in the Mid-Continent area would see some slowdowns if price weakness continues, since they are higher-cost plays, Mr. Wangler said.
Factors such as how deep the wells must be to extract shale resources and completion costs affect the price per well.
In the Bakken formation in the Williston, a ballpark cost per well is $10 million. In the Permian Shale of Texas, it’s closer to $9 million. In the Eagle Ford of South Texas, it’s roughly $9 million to $9.5 million, Mr. Wangler said.
“Some wells just won’t be as economic, and companies won’t drill as many,” he said. “So, to stop drilling in the true sense of the word, probably not going to happen; but we would see a slowing of drilling, and you would start to see that at a quicker pace if this continues.
“On a per well basis, you’re probably talking in the mid-$60s before you decide to cut back,” Mr. Wangler said.
From the point of view of a U.S. exploration-and-production company, officials are thinking about returns, said Dave Meats, E&P analyst for Morningstar Inc.
“You have to look at the project, the payback period and decide whether that’s economic or not. The key thing to think about is the break even — at what price do I stop being in the money?” he said.
“If I told you the Permian breaks even at $75, that’s still a huge generalization,” Mr. Meats said. “You have so many counties of Texas involved in the play, and the geology is a moving target.
“So you might be able to drill at $75 a profitable well in Midland County in the Permian, but if you step out in another outlying county — maybe because your well performance is going to be less impressive as you move away from the central part of the play — maybe that price is $80 to $85 a barrel.”
It’s also about what commodities drillers are pulling out of the rock.
In the Marcellus, companies can drill a dry gas well in Susquehanna County and drill a well in the liquids-rich areas of Washington County. They might pay more to drill in Washington County, but also get different commodities to sell in addition to the natural gas, he said.
“That’s a perfect example of how these things can change,” Mr. Meats said.
How long is a sustained period?
“It’s not really how long it is, but how long the CEO thinks it’s going to be,” Mr. Meats said. “If you’re running in the Permian and think you should drop rigs and trim your budget, it doesn’t matter what actually happens. On the other hand, maybe the CEO thinks its a temporary thing and keeps drilling anyway, which exacerbates the problem if you’re wrong.
“If there’s a slowness to accept the reality that there’s a potential correction in global demand, and that there’s unlikely to be relief in the form of an OPEC cut, there will be more unwanted production,” he said.